The US stock market is up more than 14% year-to-date, trading 3% above fair value. Morningstar warns of no cushion for error in AI mega-cap stocks. Small-value stocks are the most undervalued, while utilities and financial services are overvalued. Morningstar lists 33 undervalued US stocks to watch in Q4 2025.

Basic-materials stocks are 3% overvalued, with 45% trading with 4 or 5-star ratings. Communication-services sector is 1% overvalued, with telecom subsector offering opportunities. Consumer cyclical stocks are 8% overvalued, with apparel industry showing potential. Consumer defensive stocks are 9% overvalued, with alcoholic beverages industry undervalued.

Energy stocks are 7% undervalued, with exploration and production subsector having undervalued names. Financial-services sector is 11% overvalued, with capital markets industry showing undervalued pockets. Healthcare stocks are 5% undervalued, with healthcare plans industry undervalued. Technology stocks are fairly valued, with software stocks looking undervalued.

Utilities stocks are 12% overvalued, with frothy valuations expected to decrease. Morningstar suggests that most utilities are planning for significant energy demand growth. Undervalued stocks trade below fair value estimates, with metrics like P/E or P/CF used to determine worth. Morningstar rates 4 and 5-star stocks as undervalued and 1 or 2-star stocks as overvalued.

Read more at Morningstar: 33 Undervalued US Stocks for Q4 2025